Student loan payments: get advice and actual numbers here Forum

[Jchance]

One other thing about PAYE: I plan to go solo within a year or two. When you are self-employed, so much is deductible from AGI that I bet a good amount that you can get your payments comically low.

Say you make $100k income, you can deduct...

401k: $18,000 plus 25% of net income (call it $13,000 in my scenario, but can be up to $53,000 total);
Traditional IRA: $5,500
Home Office Deduction: obviously varies but mine would be about $1800
Automobile Expenses: $3,000
CLE Deductions: $1,000
Deduct half of self-employment tax
Internet and Phone: $5,000
Health Insurance: $4,000
HSA: $6,200

There's more but I'm too lazy to look them up, but that brings AGI down to about $45,000, which means student loan payments between $175-200 (which then contribute to student loan interest deduction).

Just something to think about if you think you might have an itch to go solo.

Being self-employed, you can utilize the mega backdoor Roth method (socking away 53k in solo-401k plan) to reduce ur AGI significantly.

[Tiago Splitter]

Being self-employed, you can utilize the mega backdoor Roth method (socking away 53k in solo-401k plan) to reduce ur AGI significantly.

Wouldn't it get added back to your AGI when you convert?

[krads153]

IMO, the best strategy is probably to refi part of your loans and keep part of it in federal. Analysts suggest that the stock market isn't going to return to 2013 rates any time soon, and even under IBR, your payments on 200k loans with a biglaw salary is probably super high anyway. Just diversify your debt.

I don't agree with people who aren't paying anything down on their loans either and allowing the amounts to increase over time - I suspect future administrations will shit all over student borrowers...

Under REPAYE, the government basically subsidizes half of any unpaid interest. On top of that you get a $2500 student interest deduction. With these in effect your actual interest rate is like 2-3% (or somewhere close).

So it's definitely beneficial to pay as little as possible towards your loans. Take the subsidies and deductions and run.

And what about dat tax bomb?

[AVBucks4239]

IMO, the best strategy is probably to refi part of your loans and keep part of it in federal. Analysts suggest that the stock market isn't going to return to 2013 rates any time soon, and even under IBR, your payments on 200k loans with a biglaw salary is probably super high anyway. Just diversify your debt.

I don't agree with people who aren't paying anything down on their loans either and allowing the amounts to increase over time - I suspect future administrations will shit all over student borrowers...

Under REPAYE, the government basically subsidizes half of any unpaid interest. On top of that you get a $2500 student interest deduction. With these in effect your actual interest rate is like 2-3% (or somewhere close).

So it's definitely beneficial to pay as little as possible towards your loans. Take the subsidies and deductions and run.

And what about dat tax bomb?

I'd bet a decent amount of money the tax bomb will be removed, but even if it's not, I plan to be retired by the time the tax bomb hits which should reduce my tax liability for that year.

[anonnymouse]

Being self-employed, you can utilize the mega backdoor Roth method (socking away 53k in solo-401k plan) to reduce ur AGI significantly.

Wouldn't it get added back to your AGI when you convert?

Jchance is conflating two concepts: the total contribution limit ($53k) and the mega backdoor Roth procedure of making in-service rollovers of 401k post-tax contributions to Roth IRA, which is doable up to the total contribution limit.

In AVB's post, the total contribution limit is hit with all pre-tax money in order to massively reduce AGI.

(Edit: in other words, AVB knows what he's talking about, Jchance does not)

[krads153]

IMO, the best strategy is probably to refi part of your loans and keep part of it in federal. Analysts suggest that the stock market isn't going to return to 2013 rates any time soon, and even under IBR, your payments on 200k loans with a biglaw salary is probably super high anyway. Just diversify your debt.

I don't agree with people who aren't paying anything down on their loans either and allowing the amounts to increase over time - I suspect future administrations will shit all over student borrowers...

Under REPAYE, the government basically subsidizes half of any unpaid interest. On top of that you get a $2500 student interest deduction. With these in effect your actual interest rate is like 2-3% (or somewhere close).

So it's definitely beneficial to pay as little as possible towards your loans. Take the subsidies and deductions and run.

And what about dat tax bomb?

I'd bet a decent amount of money the tax bomb will be removed, but even if it's not, I plan to be retired by the time the tax bomb hits which should reduce my tax liability for that year.

Why would Congress be incentivized to do that?

Anyway, your financial advice changes for those who aren't going to retire by age 50 and/or are under the age of 40/50.

Also, if you owe like 500k+ by then, you're going to have to pay 150k+ for taxes anyway (in addition to whatever you were paying over the 20 year period). So you'll likely have to repay 200k+ of your loans anyway.

[AVBucks4239]

Being self-employed, you can utilize the mega backdoor Roth method (socking away 53k in solo-401k plan) to reduce ur AGI significantly.

Wouldn't it get added back to your AGI when you convert?

I was actually just referring to the contribution limit for a solo-401k. Backdooring via Roth is an entirely separate concept unless I'm missing something.

[AVBucks4239]

Why would Congress be incentivized to do that?

Anyway, your financial advice changes for those who aren't going to retire by age 50 and/or are under the age of 40.

Legislation regarding student loans started with just PSLF. Then it expanded to IBR. Then it expanded to PAYE. Then it expanded to REPAYE. Each of these has been more favorable than the last.

TLDR is that student loan legislation is moving one direction, and that direction is almost unanimously more in favor of borrowers (minus the PSLF forgiveness cap). Once average Americans do 20 years of payment and then have a tax bomb, people will make a big fuss and Congress will either eliminate the tax burden or make a percentage of the forgiven amount deductible. That's obviously pure speculation but I think it's more likely than not given that we will be the big voting block in 20-25 years (think about boomers inexplicably getting their way now...that will be us in 20-25 years).

And ya, my own situation is unique, and I guess I'm just trying to explain why PAYE is right for me in the same way that others have said why paying off their debt is right for them.

But really it's not hard to plan for the tax bomb. Say you get $250,000 forgiven and that puts you in 38% tax bracket. You have 25 years to save like $100k. That's $4,000 a year. Hell, just throw your tax return from every year into an Ally account and you'd be close to being able to pay off the tax liability.

But I'd still bet a lot that some legislation eases the tax burden anyway.

[AVBucks4239]

Also, if you owe like 500k+ by then, you're going to have to pay 150k+ for taxes anyway (in addition to whatever you were paying over the 20 year period). So you'll likely have to repay 200k+ of your loans anyway.

$200k over the course of 25 years is a hell of a lot less (in terms of TVM) than $200k over the course of 7 years.

[Mr. Peanutbutter]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

[PMan99]

Also, if you owe like 500k+ by then, you're going to have to pay 150k+ for taxes anyway (in addition to whatever you were paying over the 20 year period). So you'll likely have to repay 200k+ of your loans anyway.

$200k over the course of 25 years is a hell of a lot less (in terms of TVM) than $200k over the course of 7 years.

Yeah. As much as the PAYE trolling gets out of hand in this thread occasionally, it's just math that with 200k of debt you're better off with PAYE under the vast majority of scenarios once you discount future payments.

[Tiago Splitter]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

The deadline is April 15 (so April 15, 2016 for 2015 contributions) so no big rush.

I would put the money in a Roth IRA if I were you, both for 2015 and 2016. 2017 you might decide to use a traditional IRA and may not be able to deduct the contribution if you are also participating in your 401k, but if that's the case just contribute to the traditional IRA and immediately convert to your Roth.

[krads153]

Also, if you owe like 500k+ by then, you're going to have to pay 150k+ for taxes anyway (in addition to whatever you were paying over the 20 year period). So you'll likely have to repay 200k+ of your loans anyway.

$200k over the course of 25 years is a hell of a lot less (in terms of TVM) than $200k over the course of 7 years.

Yeah. As much as the PAYE trolling gets out of hand in this thread occasionally, it's just math that with 200k of debt you're better off with PAYE under the vast majority of scenarios once you discount future payments.

Depends on what you think your future incomes will be as well for your PAYE calculations. I'd have to to sit down and do the math on this, so far I'm not really convinced one way or the other, especially for those of us who married people who are wealthier than us.

[AVBucks4239]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

(1) You can contribute to an IRA up until the time you pay your taxes, so don't rush contributing in December. Think about and research it until April.

(2) What's your goal? Reduce AGI or get money in a post-tax vehicle that's more liquid? If it's reducing AGI then contribute to the traditional IRA (traditional IRA = deductible). If it's staying more liquid then max the Roth (you can withdraw contributions at any time). I'd probably put it in a Roth because your AGI is already pretty low.

[Mr. Peanutbutter]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

The deadline is April 15 (so April 15, 2016 for 2015 contributions) so no big rush.

I would put the money in a Roth IRA if I were you, both for 2015 and 2016. 2017 you might decide to use a traditional IRA and may not be able to deduct the contribution if you are also participating in your 401k, but if that's the case just contribute to the traditional IRA and immediately convert to your Roth.

What's the situation with this? I've read about it on all the sites that describe Roth IRAs at the most basic level, but they never go into much detail. I don't think my firm offers a 401(k), but I also haven't really looked into it yet.

Also I think I remember reading somewhere that I have until April 15 to contribute, but until December 31 to actually open the account. Anyone have suggestions on where and what kind of vehicles to use?

[Tiago Splitter]

Also, if you owe like 500k+ by then, you're going to have to pay 150k+ for taxes anyway (in addition to whatever you were paying over the 20 year period). So you'll likely have to repay 200k+ of your loans anyway.

$200k over the course of 25 years is a hell of a lot less (in terms of TVM) than $200k over the course of 7 years.

Yeah. As much as the PAYE trolling gets out of hand in this thread occasionally, it's just math that with 200k of debt you're better off with PAYE under the vast majority of scenarios once you discount future payments.

Depends on what you think your future incomes will be as well for your PAYE calculations. I'd have to to sit down and do the math on this, so far I'm not really convinced one way or the other, especially for those of us who married people who are wealthier than us.

It does get hairy when you consider the payments you have to make during the 20 years. But the tax bomb is really an amazing tradeoff because it means you just got the rest of the balance forgiven. Someone with 250k who paid nothing to his loans for 20 years would owe 600k (thank you simple interest!) and would then pay taxes on that. 40% of 600k is only 240k, which means he ended with a negative interest rate.

[Mr. Peanutbutter]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

(1) You can contribute to an IRA up until the time you pay your taxes, so don't rush contributing in December. Think about and research it until April.

(2) What's your goal? Reduce AGI or get money in a post-tax vehicle that's more liquid? If it's reducing AGI then contribute to the traditional IRA (traditional IRA = deductible). If it's staying more liquid then max the Roth (you can withdraw contributions at any time). I'd probably put it in a Roth because your AGI is already pretty low.

My main dilemma is about whether that money will do more work in an IRA that I (presumably) won't touch for the next 35 years, or if I should forego taking out the living expenses fed loans next semester. But this is in the context of already having close to $200k by the time I graduate anyway.

[Tiago Splitter]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

The deadline is April 15 (so April 15, 2016 for 2015 contributions) so no big rush.

I would put the money in a Roth IRA if I were you, both for 2015 and 2016. 2017 you might decide to use a traditional IRA and may not be able to deduct the contribution if you are also participating in your 401k, but if that's the case just contribute to the traditional IRA and immediately convert to your Roth.

What's the situation with this? I've read about it on all the sites that describe Roth IRAs at the most basic level, but they never go into much detail. I don't think my firm offers a 401(k), but I also haven't really looked into it yet.

Also I think I remember reading somewhere that I have until April 15 to contribute, but until December 31 to actually open the account. Anyone have suggestions on where and what kind of vehicles to use?

You have until April 15 to both open the account and fund it. Use an online brokerage firm that does not charge fees and offers ETF's with extremely low expense ratios. Vanguard, Schwab, etc.

As for Roth conversions there is no income limit like there used to be so anyone can convert pre-tax money to Roth. There is an income limit on Roth contributions though so you need to first put it into the traditional IRA and then convert if your income is too high, which is the case for all biglaw associates.

Regarding the 401k/IRA combo, if neither you nor your spouse participate in a retirement plan through work you can deduct your IRA contribution regardless of income. If either of you are in an employer-sponsored plan the deduction may not be allowed if your income is too high.

My main dilemma is about whether that money will do more work in an IRA that I (presumably) won't touch for the next 35 years, or if I should forego taking out the living expenses fed loans next semester. But this is in the context of already having close to $200k by the time I graduate anyway.

Personally I think it's a good idea to build up some Roth money before aggressively paying down your loans so you might as well start now. In the end it's not going to make a huge difference either way, and it will be nice to have some cash saved.

[AVBucks4239]

My main dilemma is about whether that money will do more work in an IRA that I (presumably) won't touch for the next 35 years, or if I should forego taking out the living expenses fed loans next semester. But this is in the context of already having close to $200k by the time I graduate anyway.

The difference between $190k and $200k in loans is minimal. The difference of having $11k liquid and none of that liquid is pretty significant. So I'd say take out the loans and max your IRAs.

[AVBucks4239]

It does get hairy when you consider the payments you have to make during the 20 years. But the tax bomb is really an amazing tradeoff because it means you just got the rest of the balance forgiven. Someone with 250k who paid nothing to his loans for 20 years would owe 600k (thank you simple interest!) and would then pay taxes on that. 40% of 600k is only 240k, which means he ended with a negative interest rate.

This + TVM + ability to plan + chance that Congress removes tax bomb = tax bomb shouldn't be high on your list of concerns when deciding to do PAYE or pay off your loans.

[BmoreOrLess]

(1) You can contribute to an IRA up until the time you pay your taxes, so don't rush contributing in December. Think about and research it until April.

Not tax advise, use your own research, consult a professional, etc. But if I remember correctly you might be able to file your return before the contribution; you just have to make the contribution for the prior year (people fuck this up all the time) by April 15 (or whatever the filing deadline is). Again, I have no idea if this is currently the case because I haven't looked at the IRS publications in a while so this is not current advise and do your own research, but I believe you could do that in the past.

[Tiago Splitter]

(1) You can contribute to an IRA up until the time you pay your taxes, so don't rush contributing in December. Think about and research it until April.

Not tax advise, use your own research, consult a professional, etc. But if I remember correctly you might be able to file your return before the contribution; you just have to make the contribution for the prior year (people fuck this up all the time) by April 15 (or whatever the filing deadline is). Again, I have no idea if this is currently the case because I haven't looked at the IRS publications in a while so this is not current advise and do your own research, but I believe you could do that in the past.

This is correct. You can pull a Ned Flanders and file on January 1st with a deduction for an IRA contribution without actually putting the money in your IRA until April 15.

[AVBucks4239]

(1) You can contribute to an IRA up until the time you pay your taxes, so don't rush contributing in December. Think about and research it until April.

Not tax advise, use your own research, consult a professional, etc. But if I remember correctly you might be able to file your return before the contribution; you just have to make the contribution for the prior year (people fuck this up all the time) by April 15 (or whatever the filing deadline is). Again, I have no idea if this is currently the case because I haven't looked at the IRS publications in a while so this is not current advise and do your own research, but I believe you could do that in the past.

This is correct. You can pull a Ned Flanders and file on January 1st with a deduction for an IRA contribution without actually putting the money in your IRA until April 15.

Even better then. I've contributed just $1,00 to Traditional IRA this year but might add a couple grand to lower my AGI this year.

[Mr. Peanutbutter]

Sweet. I didn't take any extra exemptions (deductions? whatever) during my SA, so I'll just dump my tax return into an IRA.

[hous]

Quick question about IRAs:

I'm working during 3L and can afford to put money into an IRA. My AGI for 2015 will likely be ~$45k, and then next year will probably be whatever stub-year is plus ~$15k. I still have access to loans next semester for living expenses. My debt will already be ~$190k if I don't take out the extra money for living expenses.

What do you think about opening an IRA before Dec. 31, putting the max $5.5k into it this year, and $5.5k next year? If I understand it correctly, I won't be able to contribute during my first full year at $160k, but would the amount that would grow tax free be worth adding to my student loan debt a little more, especially given that I'll likely be PAYEing for a while? A little lost on what to do, and know I've gotta open the account here soon if I'm going to do it. It seems like a relatively small amount of money in the long run, but then again this whole Roth IRA thing seems like it might be too good to pass up while I can.

If you are going to use PAYE, IBR, or PSLF then open an IRA and fund it. If you are going to pa your loans off then don't open an IRA and pay off loans now.